Hedge Funds Face Fierce Headwinds in the Fight to Grow Assets

It appears that the hedge fund industry, on average, will end 2016 on the wrong side of the S&P 500, the arbitrary benchmark, which in the eyes of many, heralds a successful level of performance. The S&P 500 is up some 10.5 percent year-to-date, while average aggregate hedge fund gains hover around 4.5 percent.

Another Year of Mediocrity

One can debate the merits of using the S&P 500 as a benchmark for hedge fund performance, but no matter how persuasive the argument, the fact is that many hedge fund firms are disappointing their investors. This is irrefutable, borne out by -$77 billion in net outflows through October 2016. This is the first time in recent memory that, taken together, hedge funds will experience negative annual growth in assets under management. Another unpleasant fact is that hedge fund closures have outpaced hedge fund starts in 2016.

Investor Backlash

After eight consecutive years of underperforming any number of broad market indices, investors are saying, enough is enough. Major insurers such as MetLife and AIG cut back their hedge fund investments in a substantial way. Public pension funds also expressed their dissatisfaction with massive redemptions. Underperformance wasn’t the only issue that irked insurers, public pension funds and other investors; it was that they were paying excessively for the privilege. Hedge fund fees have always drawn fierce criticism, but the combination of high fees, poor returns and/or losses, became a burden too heavy to bear for a significant swath of investors.

Winners and Losers

In all human endeavors, there are winners and losers. The hedge fund industry is no exception. Average returns in the industry are lackluster, but some hedge funds that have managed to exceed the S&P 500’s gains by two, three, and fourfold. For example, Cheyne Capital’s Total Return Credit Fund was up almost 43 percent for the year through October. It is reported that at least one-half of more than 11,000 hedge funds are in positive territory, if not up to the gains enjoyed by the S&P 500.

Hedge fund investment is not a spectator sport. The Chicago Cubs enjoyed a fan base that remained loyal to the franchise for generations. These fans were finally rewarded with a World Series victory after 108 years. Unlike Cubs fans, investors expect hedge funds, and their managers to produce wins each year.

It is realistic to speculate that the number of hedge funds will continue to decline if poor performance continues to be coupled with high fees.

Hedge Fund Jobs

The shrinking numbers of hedge fund firms do not necessarily signal a shortage of hedge fund jobs. While it is true that a percentage of this capital has fled the hedge fund industry for other opportunities, much of it has been reinvested into higher performing firms. As these firms swell their assets under management, they will likely be reaching out for the talent necessary to meet their obligations to their investors. Rather than despair, recognize that this is capitalism at its best. In a capitalistic economy, only the strongest performers survive and survive they will. So hone your skills, improve your network and redouble your job seeking efforts.